Getting closer to your suppliers is now more important than ever

As a result of globalisation and the constant quest for the lowest price, events like the Bangladesh factory collapse are a demonstration of the way that supply chains have become ever-more extended and global in nature.

At the same time, rapidly-growing economies such as China and Brazil are increasingly not just a cheap source of goods, but also competitors for those goods and the inputs that go into making them.

“Supply chains are now being asked to do more than ever before; produce more with fewer resources, access new markets, reduce costs, respond to new consumer demands, adapt to new outside influences and prepare for a long-term structural increase in demand,” says Justin Sherrard, an analyst at Rabobank and an expert in supply chains in the food and agriculture sector.

Businesses also find themselves having to deal with a range of issues that in the past were perceived to be non-financial and non-core, particularly in relation to environmental problems such as climate change, water shortages and resource scarcity, but which are now very much part of the ‘mainstream’. These extend also to social issues, such as labour conditions, bribery, corruption and child labour.

For example, industry has come under increasing pressure to cut carbon emissions; most recently with the International Energy Agency declaring that only a third of current fossil fuel reserves can be burnt if we are to limit average temperature rises to 2°C. This has led to a number of studies highlighting the fact that many companies, and indeed entire industries, are overvalued because markets are basing valuations on assets that cannot be used.

New research from Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment claims that between 60-80% of coal, oil and gas reserves of publicly listed companies are “unburnable” if the world is to have a chance of not exceeding global warming of 2°C.

“Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision,” says Lord Nicholas Stern, chair of the Grantham Institute.

Meanwhile, Oxford University’s Smith School of Enterprise and the Environment has launched a four-year research programme into stranded assets in sectors including agriculture, transport, power generation, property and a range of commodities. “Investors continue to deploy hundreds of billions of pounds into polluting and unsustainable sectors,” says Lord Deben, chairman of the Committee on Climate Change. “In many cases these investments will not be worth what investors think.

“Climate change, scarcer resources, and new disruptive technologies will reduce value and strand assets.”

That makes it essential for companies to reduce these risks by embracing a more sustainable way of operating. Every business is under increasing pressure to protect resources, says Dax Lovegrove, head of business and industry at WWF. “It is critical for any corporation hoping to thrive in the future. It is about future-proofing the business.”

In tackling such problems, companies must first deal with their own operations.

Asda, the supermarket chain owned by Walmart, has been focused on sustainability since 2005, says Julian Walker-Palin, the company’s UK head of corporate sustainability. “The first five years were mainly focused on us and our own operations. It was only right that we get our own house in order first.”

Nonetheless, it is impossible to truly cut the environmental impact of a company without addressing the supply chain, says Simon Brown, managing director of Enterprise Services at 2degrees. “As a typical rule of thumb, there is ten times more impact in the supply chain than there is in an enterprise’s direct operations – whether that’s in water, waste or energy.

“There is a big prize out there, but by its nature, the value that can be realized through greater resource efficiency is shared along the supply chain,” he adds, “so businesses have to work closely with suppliers.”

For example, Tesco is trying to reduce the carbon emissions in its product range by 30% by 2020. To achieve this, Tesco is working closely with thousands of organisations. Launched by 2degrees in 2010, the Tesco Knowledge Hub and the Tesco Producer Network are dedicated to forging closer relationships between the retailer and its international producers, farmers, growers and suppliers.

“We realised that our suppliers had lots of pockets of information but that it was very fragmented,” says Andrew Yeo, head of supply chain carbon reduction at Tesco. “There is a huge benefit from helping suppliers to join up their expertise.”

The hub allows Tesco and its suppliers to share best practice on environmental issues. With many players still in the early stages of developing and implementing environmental plans, there are plenty of opportunities to accelerate their learning by sharing research analysis, environmental insights and company case studies.

“It is partly about providing a platform that enables businesses to communicate at scale,” says Brown. “But it is about far more than the technological capability – that is not in itself enough to get busy people engaged in a meaningful conversation about resource efficiency.”

Talitha Cherry from Tru-Cape, a South African-based supplier of soft fruit, says: “The Tesco Producer Network is very effective, I use it regularly. The main benefit is that the information you need is immediately available and it’s very practical. You can ask questions and get the right answer straight away.”

Indeed, corporations are increasingly realising that they cannot achieve their goals on their own.  Lovegrove agrees: “In the past, companies were working more in isolation. Now we are moving towards more collaborative stewardship of natural capital.”

The issue of water scarcity illustrates why this is important. People used to think they could address this through implementing water efficiency measures at company level. However, enlightened companies now recognise that it needs to be tackled at the level of the river basins that their supply chains are dependent on.

“Generally, about 70% of an individual organisation’s impacts occur upstream,” says Professor Steve Evans, director of research in industrial sustainability at the University of Cambridge’s Institute of Manufacturing. “But it’s the same story for those suppliers right back up the chain until you end up in a mine or a farm. You have to help your suppliers sort out their own supplier impacts.”

For many companies, this will require a profound realignment of their supply chain relationships. A recent report by logistics management company, Achilles, revealed that almost 20% of companies have no information about their suppliers’ suppliers, leaving them exposed to risks that they do not even know about, as in the horsemeat scandal. “Companies have not treated their suppliers very well in the past and there is no loyalty there, so there is a need to rebuild relationships,” says Martin Chilcott, CEO of 2degrees.

Yet a supply chain approach can galvanise collective action towards a common goal, adds Estelle Herzenhorn, head of supply chain at WRAP, the waste reduction organisation. “Any activity to improve resource efficiency is more effective with supply chain collaboration,” she says.

Helen Alder, head of knowledge and product development at the Chartered Institute of Purchasing and Supply (CIPS), highlights the value of tools such as supplier hubs and electronic data interchanges. “If one supplier is doing something really well then others can learn from that and if an organisation wants to implement a new way of working, it’s a good way to spread best practice.”

They also allow new collaborations to emerge, such as “milk-round deliveries”, where suppliers share transport for deliveries to improve efficiency and cut costs.

CIPS is hoping to streamline the process of improving supply chains with its Sustainable Procurement Index, which aims to create a standard way for companies to request information on suppliers’ sustainability performance and stop them being inundated with differing requests from their customers.

Asda is also among the companies that have established supplier resource efficiency hubs run by 2degrees.

Having an outside organization running the hubs adds value for the large companies at the top of the supply chain. “A trusted third party can be critical and gather data anonymously,” says Brown. “Suppliers are not embarrassed in front of their customers. Over time, people come to trust in that process.”

And there are real business benefits to be had from these supplier hubs. “Applying a sustainability lens to business enables you to unlock hidden costs,” says Chilcott. “Normally, costs are driven down by a focus on narrow silos. But hidden opportunities often lie between the silos, from sharing facilities, technology and the like.

“We’re helping Asda, for example, to uncover about £1bn in costs in its food supply chain by 2020.”

Good supply chain collaboration on sustainability has knock-on benefits in other areas such as cost and quality, says Prof Evans. “It really can result in some excellent economic logic that makes companies want to keep investing because the return on investment is so great.”

Mike Scott is a freelance journalist.